SYLLABUS

GS-3: Indian Economy and Issues Relating to Planning, Mobilization of Resources, Growth, Development, and Employment.

Context: Recently, the RBI sold ₹25,000 crore of Government securities through an OMO auction to absorb surplus banking-system liquidity amid large foreign-currency inflows.

More on the News

• Second OMO tranche: On September 21, 2026, the RBI accepted the entire ₹25,000 crore notified amount against bids worth ₹84,982 crore, as part of its OMO sale programme.
• ₹1 lakh crore programme: The RBI is conducting the OMO sales in three tranches—₹50,000 crore on September 17 and ₹25,000 crore each on September 21 and September 28. With the second tranche, ₹75,000 crore had been auctioned.
• Surplus liquidity: System liquidity surplus stood at around ₹6.05 lakh crore on September 20, down from its early-September peak of about ₹11.16 lakh crore following liquidity-absorption measures and other flows.

Understanding Open Market Operations (OMO)

• What are OMOs? Open Market Operations refer to the RBI’s outright purchase or sale of Government securities in the market to influence durable liquidity conditions in the financial system.
• OMO Purchase → Liquidity Injection: When the RBI purchases Government securities, it pays the sellers, thereby injecting rupee liquidity into the banking system.
• OMO Sale → Liquidity Absorption: When the RBI sells Government securities, participating banks and other investors pay the RBI for the securities. The corresponding rupee funds are withdrawn from the financial system, thereby absorbing liquidity.
• Why are OMOs used? Unlike short-term liquidity operations, outright purchases or sales of securities can be used to influence the durable component of system liquidity. The RBI can therefore use OMOs alongside instruments such as repo and Variable Rate Reverse Repo (VRRR) operations to calibrate liquidity conditions.

Factors for Surge in Liquidity

• FCNR(B) mobilisation: A major source of the liquidity build-up was the large mobilisation of Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits under the RBI’s special USD-INR forex swap facility.
• Rupee liquidity through swaps: Banks brought in foreign currency through these deposits and subsequently swapped the foreign currency with the RBI for rupee funds, thereby increasing rupee liquidity in the domestic banking system.
• Scale of foreign-currency inflows: As of September 18, total inflows under the special USD-INR swap facility stood at $143.596 billion, comprising $132.98 billion through FCNR(B) deposits, $5.32 billion through Overseas Foreign Currency Borrowings (OFCBs), and $5.296 billion through External Commercial Borrowings (ECBs).
• Government expenditure: Month-end government expenditure, including salary and pension payments, also added to system liquidity. Subsequent tax and GST-related outflows helped absorb part of the surplus.

Need for Absorbing Surplus Liquidity

• Aligning money-market rates: Excess liquidity puts downward pressure on overnight rates as banks seek to deploy surplus funds. Absorption helps keep the Weighted Average Call Rate (WACR) aligned with the RBI’s policy repo rate.
• WACR is the average interest rate at which banks lend and borrow unsecured funds overnight in the call money market.
• Strengthening transmission: Keeping short-term market rates close to the policy rate ensures more effective transmission of the RBI’s monetary-policy signals to broader financial conditions.
• Managing durable liquidity: Liquidity generated by substantial forex inflows and swaps can persist; hence, OMO sales help absorb durable liquidity, while instruments such as VRRR address shorter-term fluctuations.
• Liquidity management vs rate change: OMO sales alter the quantity of liquidity in the system and, by themselves, do not constitute a change in the policy repo rate or necessarily indicate a change in monetary-policy stance.

Significance and Implications

• Better policy transmission: Recent liquidity absorption helped bring the WACR to 5.24% on September 21 from 4.92%, closer to the policy repo rate.
• Orderly money markets: Calibrating surplus liquidity prevents persistent downward pressure on overnight rates and helps the RBI maintain its desired operating conditions.
• G-Sec market impact: OMO sales increase the supply of Government securities in the market, potentially influencing G-Sec prices and yields through demand-supply conditions.
• Managing forex-induced liquidity: The episode highlights the need to balance substantial foreign-currency inflows and the resulting rupee liquidity through subsequent liquidity-absorption operations.
• Multi-instrument approach: The use of OMOs alongside VRRR operations demonstrates the RBI’s ability to manage liquidity according to its persistence and nature.